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I live in the US and use a service to calculate my cryptocurrency capital gains taxes. I have previously always left it on the default FIFO calculation. But this time I was curious and made it recalculate with LIFO (just to see) and it showed me a lower amount of taxes due. Is it okay to switch back and forth each year depending on which one is better? If not, when is it ever possible that I could choose to use LIFO in the future?

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  • I've removed the crypto tag because the situation is applicable to capital gains in general, not just crypto.
    – D Stanley
    Oct 14 '21 at 18:08
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You can apply to switch accounting methods, but you have to get permission from the IRS, and may have to go back and restate all capital gains that were calculated using the previous method. You can't choose whatever method will give you the lowest tax in a given tax year.

Note that the accounting method will eventually be irrelevant if/when you sell the rest of your crypto. You may have a lower tax bill now (because you're selling crypto with a higher cost basis) but if you ever sell all of your crypto, you'll eventually get to the crypto that has a lower cost basis and will pay more tax then.

So it's really just deferring taxes unless you plan to trade the same crypto forever.

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I think D Stanley's answer has some confusing statements that aren't really relevant.

You can apply to switch accounting methods, but you have to get permission from the IRS

This seems to refer to Form 3115, which is mainly for businesses changing accounting methods. In that context, LIFO, FIFO, etc., refer to business inventory.

Despite some apparent misinformation that suggests this applies to typical crypto investors, most ordinary people are not considered "traders" (stock or crypto) by the IRS because they are not in the business of trading. They are doing personal investing. It is actually rather difficult to qualify as a professional trader for tax purposes.

In the context of personal investing (stock or crypto), what matters for capital gains is the identification of which shares/coins (purchased when and at what price) are involved in each particular sale. Once such shares/coins are identified as sold, they are no longer part of your holdings and are not eligible to be sold again. So there is no real potential for abuse in switching between LIFO and FIFO, because after you switch, the identification is made only among your remaining holdings. As you sell, you are "using up" a well-defined set of assets and cost bases, in an order of your choice.

What matters to the IRS is that you have irrevocably committed, as of the time of each sale, to which shares/coins are being sold. This is done by having your instructions on record with your broker, or by accepting the default (FIFO). FIFO and LIFO are standing policies that you can elect (with your broker), which then determine the identification of each sale as long as you keep them in effect. Alternatively, you can use "specific identification" to define manually, at your full discretion, the pertinent shares/coins at the time of each sale. These methods are always subject to the rule mentioned above, that you can only sell what you haven't already sold.

Specific identification can be used with crypto, which means you can effectively switch among FIFO, LIFO, or other schemes at any time:

Although there is no direct guidance on this issue, changing the tax lot ID method from year to year would be accomplished by using Specific ID. For example, you could go from FIFO to HIFO as long as you can specifically identify the units you are selling. Moreover, in the tax forms, you are not required to report which method you are using. You will only have to provide that info and substantiate your calculations if your tax return gets examined.

This is confirmed by the IRS:

Q39. I own multiple units of one kind of virtual currency, some of which were acquired at different times and have different basis amounts. If I sell, exchange, or otherwise dispose of some units of that virtual currency, can I choose which units are deemed sold, exchanged, or otherwise disposed of?

A39. Yes. You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.

So, you can switch from FIFO to LIFO at any time, but it would only apply to sales that occur after you record that choice, and the meaning of "last" or "first" would be among the shares/coins you still own at the time of sale.

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  • On the specific platform I use (cryptotrader.tax), when I switch my method from LIFO to FIFO or visa versa, it recalculates back through my entire history of trades (not just the current tax year.) If I'm understanding what you're saying correctly, I would need a more nuanced calculation that took specific measures to allow for the switch. Does that seem correct?
    – Brimby
    Oct 28 '21 at 15:13
  • @Brimby Right, you cannot change the identification for past trades, only future trades. Past trades are determined by whatever election (or default) you had in place at the time. Note that the site you mention is the one I identified as featuring apparent misinformation.
    – nanoman
    Oct 28 '21 at 20:19

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